Court distinguishes reserves, rules in favor of revenue on accumulated profits, assessee on call monies.

The court held that the amounts set apart as initial and development rebate reserves in the company's account were considered accumulated profits. The court distinguished between depreciation and development rebate reserves, concluding that the development rebate reserve should be treated as accumulated profits. As the development rebate reserve exceeded Rs. 1,65,000, there were sufficient accumulated profits. However, the sum of Rs. 1,65,000 debited in the assessee's account for call monies could not be treated as a loan or advance as it was merely a book entry, not an actual cash payment. The court ruled in favor of the revenue on the first issue and in favor of the assessee on the second issue.

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Issues Involved:
1. Whether the amounts set apart as initial and development rebate reserves in the account of M/s. Chandra Textiles (P.) Ltd. could be held as part of the accumulated profits of the company.
2. Whether the sum of Rs. 1,65,000 debited in the account of the assessee in the books of the company for the year ended on December 31, 1958, towards first and second call monies due in January and March 1959, are cash advances within the meaning of section 2(6A)(e).

Issue-Wise Detailed Analysis:

Issue 1: Initial and Development Rebate Reserves as Accumulated Profits
The court had to determine if the amounts set apart as initial and development rebate reserves could be considered part of the accumulated profits under section 2(6A)(e) of the Income-tax Act, 1922. The assessee contended that these reserves were special provisions for specific purposes and should not be considered accumulated profits. However, the Income-tax Officer and the Tribunal held that these reserves, being created out of profits, should be treated as accumulated profits. The court referred to its earlier decision in T.C. No. 271 of 1966, which held that the "development rebate reserve" is not a tied-up reserve and should be considered as accumulated profits. The court distinguished between "depreciation" and "development rebate," noting that depreciation is a charge on profits meant to replace the value lost by wear and tear, while development rebate is a saving out of current profits intended for capital formation. The court concluded that initial depreciation reserve should not be treated as accumulated profits, but the development rebate reserve should be. Since the development rebate reserve itself exceeded Rs. 1,65,000, the court held that there were sufficient accumulated profits to attract section 2(6A)(e). Therefore, the first question was answered in favor of the revenue.

Issue 2: Sum of Rs. 1,65,000 as Cash Advances
The second issue was whether the sum of Rs. 1,65,000 debited in the assessee's account for call monies could be treated as cash advances under section 2(6A)(e). The assessee argued that there was no actual cash payment, only a book entry, and thus it should not be considered an advance or loan. The court agreed, stating that the term "payment" in section 2(6A)(e) implies an actual flow of money, not merely a book adjustment. The court referred to the decision in Paton v. Inland Revenue Commissioners, which emphasized that payment must be real, not notional. The court also considered the decision in T. Sundaram Chettiar v. Commissioner of Income-tax but distinguished it on the grounds that there was no initial cash payment in the present case. Therefore, the court concluded that the sum of Rs. 1,65,000 could not be treated as a loan or advance, and section 2(6A)(e) could not be invoked. The second question was answered in favor of the assessee.

Additional Consideration:
The assessee-family also raised the contention that the family, not being a registered shareholder, could not attract section 2(6A). The court referred to the Supreme Court's decision in Commissioner of Income-tax v. C. P. Sarathy Mudaliar, which held that the term "shareholder" refers to the registered shareholder, not the beneficial owner. The court agreed that the Hindu undivided family could not be considered a shareholder under section 2(6A)(e), and thus the section could not be invoked against the assessee-family. This point was entertained despite not being raised before the Tribunal, as it was within the ambit of the question referred.

Conclusion:
In T.C. No. 298 of 1966, the assessee was a registered shareholder, and the only issue was whether the debit and credit entries for call monies could be treated as a loan. Following the reasoning in T.C. No. 297 of 1966, the court held that mere book entries could not be treated as a loan. Therefore, the second question was answered in favor of the assessee, and the first question in favor of the revenue. No order as to costs was made in both cases.

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